February 22, 2013 / 3:31 PM / 5 years ago

UPDATE 2-Darden diners squeezed as payroll tax, gasoline costs up

* Traffic to Olive Garden, Red Lobster, LongHorn Steakhouse falls

* Company is latest to signal consumer spending pullback

* Results better than Wall Street’s worst case, shares rise

By Lisa Baertlein

Feb 22 (Reuters) - Darden Restaurants Inc warned on Friday that profits at its Olive Garden and Red Lobster chains were being squeezed as customers retrenched because of the U.S. payroll tax hike and higher gasoline prices.

Orlando-based Darden, which has struggled to find a way to appeal to frugal diners, also lowered its fiscal 2013 profit forecast on worse-than-expected quarterly results.

Darden is the latest U.S. company to signal a spending pullback by domestic consumers, particularly in the middle- and low-income brackets.

Still, the company’s shares rose 4.1 percent, as the results were not as bad as some on Wall Street had feared. Pessimists foresaw an even bigger sales drop, more margin erosion than the new forecasts suggested and even a dividend cut.

Darden’s results were “encouraging” up until the middle of the third quarter, which includes the months of December, January and February, Chief Executive Clarence Otis said in a statement.

Otis cited two main factors for the deterioration in February, “increased payroll taxes and rising gasoline prices, which together put meaningful pressure on the discretionary purchasing power of our guests.”

U.S. payroll taxes went up 2 percentage points on Jan. 1. The national average price for a gallon of regular gasoline hit $3.75 on Feb. 19, the highest price on record for that calendar day and up 19 cents from a year earlier, according to the AAA Fuel Gauge Report.

The comments from Darden mirrored those from Burger King Worldwide Inc, which said the fast-food industry also suffered a hit.

Wal-Mart Stores Inc, the world’s largest retailer, also said on Thursday that its U.S. unit had a slow start to February, largely due to delayed tax refunds.

Darden shares rose to $46.55 in afternoon trading on the New York Stock Exchange.


Visits to Darden’s “Big Three” brands - Olive Garden, Red Lobster and LongHorn Steakhouse - have fallen during the current quarter and the company estimated that combined sales at those chains’ established restaurants would be down 4.5 percent when the quarter wraps up on Feb. 24.

Darden said weather, which has been more severe this year than during last year’s relatively mild winter, has also kept diners away from its restaurants.

Same-restaurant sales at Olive Garden, which generates roughly half Darden’s total revenue, are expected to be down 4 percent.

Third-quarter earnings are now forecast to be between $1.00 and $1.02 per share - significantly below analysts’ average estimate of $1.13 a share, according to Thomson Reuters I/B/E/S.

Darden also cut its fiscal 2013 profit forecast range to $306 to $3.22 per share, down from $3.29 to $3.49 per share, marking the company’s second warning on its expected 2013 profits.

The results show “how competitive and laser-focused consumers are on value right now,” Morningstar analyst R.J. Hottovy told Reuters.

“I don’t think Darden is going to be the only operator subject to some of these pressures,” Hottovy said.

While economic factors are playing a role, Hottovy and other analysts said Darden still needs to get the prices on its promotions right.

For example, it recently overestimated how much diners would be willing to pay for limited-time offers like Olive Garden’s Never Ending Pasta Bowl and Red Lobster’s Endless Shrimp.

Janney Capital Markets analyst Mark Kalinowski upgraded Darden’s shares to “buy” from “neutral” on Friday.

“We believe a lot of the bad news about (Darden) is already in the stock at this point,” Kalinowski wrote. “Today’s news looks to us like a classic ‘buy on the bad news’ opportunity.”

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